Econ-Development-Lesson-7Cost of Living-.pptx

Cost of Living

1. The Cost of Living Lecture 7: Economic Development

2. Inflation Inflation is the increase in prices in the economy, thereby decreasing the purchasing power of money on our hands. Salary increased by 3% But the Inflation rate is at 6% We lose 3% of our purchasing power

3. Inflation Inflation may be categorized into a general sustained increase in prices resulting from excessive demand for goods ( demand-pull inflation ), increased pricing by sellers in the absence if increased demand ( cost-push inflation ), or an expansion of the money supply ( monetary inflation ).

4. Deflation Prices of goods and services generally increase over time, but of course, at different paces. Some are increasing fast, and some are quite slow; some are not even moving, and some are decreasing, known as deflation .

5. Basket of Goods and Services The Philippine Statistics Authority (PSA) conducts a Commodity and Outlet Survey (COS) (last survey of its kind is on 2007-2008), to understand the goods and services that each household in the country purchase or consumes, and the type of channels in the country wherein these are available.

6. Basket of Goods and Services There are designated provinces and cities that are gauged in terms of consuming goods and services and are carefully chosen to represent the composite behavior of prices consumed by Filipinos.

7. Basket of Goods and Services

8. Basket of Goods and Services The largest category is the food and nonalcoholic beverages , which is almost 40% if the basket, followed by housing, water, electricity, gas, and other fuels , with roughly 20%. The next category with 12% us restaurant and miscellaneous goods and services , and the rest weighs lower than 10%.

9. Basket of Goods and Services For example, education and furnishings, equipment, and routine maintenance of the house, health and clothing and footwear have around 3% each, which communication, alcoholic beverages and tobacco , and recreation and culture have roughly 2%. This categorization of goods and services is determined by the PSA .

10. Consumer Price Index (CPI) The consumer price index (CPI) is a statistic used to measure the total goods and services purchased and consumed by a household compared to a base year.

11. Consumer Price Index (CPI) According to the Encyclopedia of American Government and Civics, CPI is a measure of the average change in the prices paid over time by urban households for a market basket of goods and services.

12. Consumer Price Index (CPI) There are many uses of the CPI, mainly for determining inflation and the purchasing power of the country’s currency to allow adjustments to the economic polices of the government.

13. Consumer Price Index (CPI) Furthermore, knowing inflation makes us more reactive to the buying behavior of the public and create laws to alleviate the standard of living of people.

14. Consumer Price Index (CPI) The first step in computing the CPI is to collect price quotations under the categories in the basket of goods and services . This will depend on the geographic coverage as well as the classification standards set by the PSA.

15. Consumer Price Index (CPI) The Philippines uses the 1999 United Nations Classification of the Individual Consumption According to Purpose (COICOP) and the 2015 Philippine Standard Geographic Classification Codes for the geographic locations.

16. Consumer Price Index (CPI) For instance, there are more price quotations required in the cities than in provinces , and there can be more price quotations on certain classification in the basket than the others .

17. Consumer Price Index (CPI) Next, we use the data collected and apply it to the basket of goods and services at various periods .

18. Consumer Price Index (CPI) From the time periods identified, we choose the base year, compute for the consumer price index, the price of the basket of goods and services in a given year divided by the price of the basket in the base year. Consumer Price Index: x 100  

19. Consumer Price Index (CPI) Another way of finding out the inflation per year is the consumer price index by comparing the CPI of the current year as opposed to the base year: Inflation Rate in Year X: x 100  

20. Consumer Price Index (CPI) Suppose we only have two products: mangoes and guyabanos . Hence, our basket of goods will be comprised of only mangoes and guyabanos. The PSA determines the weights for each product by surveying the consumption of these products. For example, the survey reveals that 6 mangoes and 4 guyabanos are bought in that period.

21. Consumer Price Index (CPI) Let’s go over the CPI and inflation computation listed as follows: Price 2019 2020 2021 Mangoes ₱11 ₱13 ₱15 Guyabanos ₱30 ₱35 ₱42

22. Consumer Price Index (CPI) Let’s now compute that yearly basket of goods: 2019 2020 2021 (₱11x6) + (₱30x4) (₱13x6) + (₱35x4) (₱15x6) + (₱42x4) ₱186 per basket ₱218 per basket ₱258 per basket

23. Consumer Price Index (CPI) Hence, the CPI from 2019 to 2021 are as follows (on base year 2019): 2019 2020 2021 x 100 x 100 x 100 100 117 139 2019 2020 2021 100 117 139

24. Consumer Price Index (CPI) Therefore, the inflation rates from 2020 and 2021 are as follows: 2020 2021 x 100 x 100 17% 19% 2020 2021 17% 19%

25. Economic Crashes Economic crashes usually begin with the vicious cycle of higher prices and the expectations of higher prices that greatly affect the buying behavior of the people.

26. Economic Crashes A vicious cycle is any situation in which an action tends to bring about a further reaction that offsets any gain brought about by the initial action and exacerbates the initial problem.

27. Economic Crashes When there is too much supply of money of circulation, the people are somehow forced to spend as quickly as possible rather than decide to save their money or let circulate in financial institutions.

28. Economic Crashes Consequently, leading to decline in personal wealth and savings and limiting foreign investments and trades, money increases too fast, and it pushes inflation instantaneously and in great magnitude, which affects the velocity of money .

29. Economic Crashes The velocity of money is the average number of times a currency is spent on purchasing goods and services.

30. Economic Crashes When this happens, and the monthly inflation rate increases over 50% or around 13,000% per year, it is called hyperinflation .

31. Economic Crashes The USA experienced the Great Depression in the 1990s, which started in 1929.

32. Economic Crashes After the Great Depression, the USA did not want to recall to that painful experience and somehow changed the term to recession , although a consistent trend of downward recession is what an economic depression is all about.

33. Economic Crashes According to the USA National Bureau of Economic Research, recession is defined as three consecutive quarters of failing real GDP, while depression includes a 10% decrease in per capita GDP and consumption and 10% unemployment that persist for at least 24 months.

34. Economic Crashes The depression was eventually reckoned with massive expansionary solution, left and right government spending until the economy finally stabilized.

35. Economic Crashes The condition when the production of goods and services slows down or is put to a halt or simply stagnates while prices are rising is called stagflation. It is simply a combination of a stagnant economy and inflation at the same time. The USA experienced a prolonged period of stagflation in the 1970s and early 1980s. There was a combination of falling demand and rising prices .

36. Cost of Living Allowance (COLA) The cost of living allowance is an adjustment applied to the income received by the employees to sustain the standard of living due to the inevitable rising prices or inflation. When the CPI increases, the COLA is then raised by the employees to maintain their standard of living .

37. Cost of Living Allowance (COLA) In other words, COLA is used to counteract the effect of inflation . So the cost of goods and services incurred has a direct impact on the COLA, to balance the economic inequality carried by the prices.

38. Cost of Living Allowance (COLA) The cost of living allowance fluctuates depending on the rise and fall of prices in the area . This is determined by a regular survey of the employees and the suppliers of goods and services, by determining the market basket categories that are set and the pattern of behavior for buying them.

39. Any Questions?